The SEC's Top Cop Is Cashing In as a Wall Street Lawyer, and You Should Feel OK About It

Robert Khuzami stepped down as director of the Enforcement Division at the Securities and Exchange Commission about six months ago, which naturally prompted speculation about where he would land. Today's New York Times has the story from Ben Protess and Peter Lattman about his new gig at Kirkland & Ellis, a major corporate law firm, complete with all the gory details about the pay package ("more than $5 million a year"), the benefits, the other big firms that wanted to recruit him, and most of all "the quintessential Washington script: an influential government insider becoming a paid advocate for industries he once policied."

And here's where I think it's important to step in with the realization that the news media has, for various professional and economic reasons, a tendency toward a systematic negativity bias. Imagine a scenario in which S.E.C. lawyers had a really hard time getting private sector jobs and almost invariably ended up needing to take a pay cut to obtain a position outside of the government. Then we'd get lots of stories about overpaid and incompetent federal bureaucrats, living high on posh government salaries (S.E.C. lawyers don't earn much compared to top private sector attorneys, but they definitely earn more than the average American) despite a lack of viable skills or job prospects. You're damned if you do and damned if you don't because "Longstanding Practice Is Basically OK" is not very a good story pitch to your editors. But there's actually specific academic research on the question of how the revolving door impacts S.E.C. enforcement actions and it concludes that S.E.C. lawyers who rotate out into the private sector are more aggressive in their enforcement efforts than those who don't.

If you manage to unplug from the revolving door narrative for a second, you can see why this makes sense—if you spend your time as a government lawyer being extremely lackadaisical in your prosecutorial efforts that's going to make you look like a bad lawyer who people don't want to hire. If you want to cash in some day, you want to have the reputation of being someone who's really smart and tough and effective and who understands how to make cases. That's the kind of lawyer who the private sector wants to hire.

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That's not to say that the bad rent-seeking version of the revolving door never happens. Clearly it does happen. But different contexts are different. One salient issue, it seems to me, is the existence of collective action problems. It wouldn't really make sense for Kirkland & Ellis (or any other major law firm) to spend millions of dollars to reward a specific individual for lax enforcement whose benefits are widespread. By contrast, when you see people moving to head trade associations that's when you ought to worry. The whole reason an American Petroleum Institute and Financial Services Roundtable exist is to advance the collective interests of the oil and banking industries respectively. Those are institutions that are well-situated to reward generally favorable treatment toward industry. A law firm is in a structurally different situation. But my main point is that we don't need to speculate on this sort of thing a priori, which is why I mentioned the paper by Ed DeHaan, Simi Kedia, Kevin Koh, and Shivaram Rajgopal which gives us specific evidence on the Securities and Exchange Commission. There are lots of other government agencies out there and lots of other forms of private sector employment, and it'd be great to see more specific research on revolving doors in those other contexts. But in Khuzami's case, I think the logic and evidence suggests that you should take his payday at face value: If you find yourself as enforcement chief at the S.E.C. the best way to get a multimillion dollar payday down the road is to try to make impressive cases and demonstrate mastery over the relevant legal and bureaucratic issues.